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Three years after accusing the city of San Jose of illegally diverting funds, a highly critical FAA draft audit remains unfinished with no formal deadline. Chief Investigative Reporter Tony Kovaleski follows a paper trail that exposes government dysfunction and wasted tax dollars. This video aired on at 11 p.m. on March 13, 2013. (Published Thursday, March 14, 2013)

The FAA has yet to issue a final audit after it initially presented a critical draft audit to the city in 2010. Current and former city and federal employees say the delays and wasted tax dollars paint a picture of government “not” at work.

The audit accuses the city of diverting millions of dollars of airport profits and government grants into the city’s general fund and found the city improperly used airport money in three different ways:

Charging the airport $11.5 million in “unnecessary rental costs” for 52 acres of city property near the airport.

Failing to comply with federal guidelines in managing nearly $80 million of land purchased with federal grant money.

Overcharging the airport millions of dollars for basic city services provided by the mayor, city council, city manager and clerk—something the FAA auditors called “unlawful revenue diversion.”

“Revenue diversion is a very serious term,” said Gabe Bruno, executive director of the FAA Whistleblowers Alliance and former high-ranking FAA manager, who reviewed the draft audit. “What it means is taxpayer money is taken and not used for the intention it is supposed to be used for.”

Although the city manages the airport, federal rules prevent it from cashing in on the airport's success.

San Jose City Manager Debra Figone agrees the accusations of revenue diversion are serious, but says they are without foundation.

“San Jose has nothing to hide,” Figone said. “We are not afraid of answering tough questions and have really tried to be very transparent in this whole audit, and to you.”

Although the city says it’s done nothing wrong, within the last year, city leaders decided to return $5.6 million—a payment for overcharging the airport for services—and cut future fees it charges the airport by 54 percent.

“The FAA pointed out something that we felt we should take a good look at and so we did,” Figone said. “I think that it speaks very well for San Jose to take protective steps.”

Even though the audit prompted the city of San Jose to make changes in its cost-allocation structure, the audit itself also raises questions about the credibility of the FAA. The first sentence of the report misstated the city as “San Diego” and the airport as the “San Diego International Airport” when referring to San Jose.

“I would say that the FAA should certainly be embarrassed about the fact they started with an audit report with the wrong name and wrong city,” Bruno said. “And, identifying the wrong airport.”

San Jose Airport Aviation Director Bill Sherry said the FAA’s mistake makes him wonder about the efficiency of the administration, and added that he believes the audit required more of a “collaborative process” between the city and the FAA.

But the NBC Bay Area Investigative Unit has found the collaborative process remains stalled and the highly critical audit remains incomplete more than three years after taxpayers funded a two-week visit by FAA auditors to San Jose to draft the first report.

The Investigative Unit’s review of hundreds of pages of emails between the city of San Jose and the FAA exposes and explains some of the government breakdowns. A June 2010 email from one of the FAA auditors reads: “Sorry for the long delay—our office is understaffed.” In another email from August 2011 Sherry writes, “No communication, either written or oral, occurred until February 2011.” The correspondence exposed an unexplained seven-month period of no activity.

“Those excuses of being short staffed and not having enough people to complete an audit are completely invalid and unacceptable,” Bruno said. “Three years is more than enough time to resolve the issues they found during that draft audit.”

Sherry said from the airport’s perspective the delay is not “one of the finer aspects of government” and added that all parties involved would have liked to have completed the audit by now.

“I don’t want to make excuses,” Sherry said, “but three years by anyone’s standards is probably excessive.”

The FAA declined multiple requests to explain the three-year delay on camera, and instead issued a written statement:

The FAA conducted a compliance review of San Jose International Airport in 2010, and is working with the airport and city to address issues we identified during that review. The FAA has not completed its review and has not reached any final conclusions as a result of that review.

The FAA also stated: “The time it takes to complete an audit is not really relevant. If we determine that money needs to be repaid, we will ensure all of the improperly diverted revenue is repaid.”

Sherry believes there is room to improve and admitted that staffing issues at the city and the airport have also contributed to the delay.

“Hopefully future audits won’t go on for three years,” Sherry said.

The FAA has not reached any final conclusions as a result of the airport review.